If you don’t know the FeedBurner story, there were four FeedBurner founders – Dick Costolo (now CEO of Twitter), Eric Lunt (now CTO of BrightTag and until recently a board member at Gnip, which Twitter just acquired), Matt Shobe (now at AngelList), and Steve.

In addition to bootstrapping his new company forever (since he’s a multi-time successful entrepreneur), Steve could easily raise an angel round any time he wanted to. So, we were psyched he was willing to do an FG Angels Syndicate with us.

Steve had some unsolicited comments for me, AngelList, and angels as a result of the process. I asked him if I could post them – he said yes. Following is a thoughtful set of reasons AngelList is so powerful, along with some constructive feedback for us to consider.

1) Some of your backers are really good citizens. When it was oversubscribed they kept their syndicate commitment, but offered a much bigger investment outside the syndicate. When 50% of the money didn’t close, they went back and put it back into the syndicate.

2) You have a bunch of “shadow backers” who seem to follow your investments, and then try to go direct to invest to avoid paying your carry.

3) There are some backers that request an awful lot of due diligence for a $1000 investment. If they are that worried about losing $1000, perhaps AngelList isn’t the right place for them to be investing.

For us, the benefits of the syndicate are:

1) Access to capital we wouldn’t have otherwise been able to raise on angel list, and offline

2) Keeping the number of entries on our cap table relatively small

3) Though #2, we still have the transparency of knowing who the “LPs” are, and can mine them for help if needed

For the investors, the clear benefits are:

1) Access to deal flow they wouldn’t otherwise get

2) Ability to diversify their funds without a huge minimum ticket

3) Piggybacking on an investment thesis without having to do the research

The only negatives so far are the days of uncertainty where do you don’t know how much is going to get filled and if you need to generate more demand or turn people away on a daily basis.

This is awesome. As a lead syndicate investor what do you do with those ‘shadow backers’? Are you able to exclude them from future syndicates?

Felix Dashevsky

Why is this a concern for you as a lead? This should be for the startup to determine. If they want to only accept a large ticket from a syndicate, so be it. But if they are willing to accept small investors for whatever reason, are you suggesting you want to stop them? AL syndicates are not meant to create an exclusionary sphere of “pay carry” or else.

http://www.feld.com bfeld

Agree. See my note about. Ultimately it’s up to the company, but if an angel is shadowing all of our investments just to avoid the carry, that seems to undermine one of the potential positive dynamics of a syndicate model.

http://www.feld.com bfeld

I’m mixed. One desire is to get more money in the company. The other is that if someone is shadowing us and investing in everything we do directly to avoid the carry, that seems like it undermines the syndicate dynamic. It also results in another investor on the cap table, which might or might not be desirable for the startup given the amount of investment from the person.

kevrmoore

But, if the startup accepts the investment directly, then that implies that the investor is desirable, yes?

http://www.feld.com bfeld

Or that the entrepreneur hasn’t thought about it. Or that they are happy to take whatever money they get. All are fine.

http://about.me/brandonmarker Brandon Marker

Those due diligence requests for such small investments (and at an early stage) are a leading sign that this type of investment probably isn’t right for them. It’s a FINRA practice that AL somehow gets a pass on.

http://www.feld.com bfeld

I’m not sure it has anything to do with FINRA. Rather, it’s investors getting comfortable with being small angels even when they have direct interaction with the companies. It’ll need to play out over time as old angels (used to doing $25k – $100k / deal) get comfortable with the Syndicate decision and new investors learn how to be angel investors.

http://about.me/brandonmarker Brandon Marker

Right, and that’s the evolution of this process. I guess my comment was more directed at the changing tide and loosening of regulatory oversight… and not as clear as your reply 😉

Sebastien Latapie

I’m wondering if there are any opportunities to create services on top of syndicates for those excessively diligent backers? Are there sets of information that they all want that could be provided upfront to reassure them?

Very cool to get a deeper view of how this is working in practice.

http://www.feld.com bfeld

The legal dynamics around this are VERY complicated.

Felix Dashevsky

Curious, why does “50% of the money” not close?!

As background, I backed FG from the start. Involuntarily, Blinkfire was one of the last deals I did as an FG backer (Quaddra was the final): AL (quite literally) kicked me out due to my $1k/deal commitment. Very frustrating. But if 50% don’t close, not sure why that was even necessary!

Elizabeth Kraus

I will let Brad confirm, but I think this might be because of issues with the 99 investor limit that was causing more problems than AL anticipated.

http://www.feld.com bfeld

On the $1k thing, did you get the messaging about the FG Angels Syndicate Fund 1 – https://angel.co/fg-angels-syndicate-fund-i . We invited all $1k / deal investors to this entity and then had them pre-fund 10 deals. If you missed the messaging, that’s useful data as everyone should have gotten it and we tried hard to be clear that we were changing the minimum for the direct FG Angel syndicate members (deal by deal instead of pre-commit to 10) to $2k.

We continue to have 99 investor issues and this was one fix on it is the FG Angels Syndicate Fund counts as one investor. We’ll do another in about two months (after we do another 10 investments).

50% of the money doesn’t close for two reasons. (1) 99 investor issue and (2) some members of the syndicate don’t seem to be investing – just hanging out in the syndicate. We’re going to do something about the non-participants at some point.

Felix Dashevsky

I did get a message about the pre-commit fund. However, it came months after the backer limit was raised to $2k. Since I hadn’t gotten kicked out and was allowed to keep funding, which I took as an active decision on FG’s part, I ignored the pre-commit. The message also came from AL, not FG. I certainly paid much less attention to it because of that (it seemed plausible that AL was spinning up the pre-commit to allow new investors in, rather than culled old ones).

In the end, it felt like AL was fixing a software bug, not dealing with live investors who are committing $50k and up. I guess poor investor relations are at the core of my frustration. I have future concerns as well, being off the backers list, such as FG communications about past investments (altho AL assures me I’ll still somehow get them).

http://www.feld.com bfeld

Sorry we did a poor job and I appreciate the direct feedback. As we’ve said from the beginning there will be some bumps as we figure this all out – this was clearly one of them.

Philip Smith

Yes, I did miss the message about the $10k pre fund for investors at the $1k commitment level for Fund I. will will and

Elizabeth Kraus

Super helpful!! Thanks for sharing. A few thoughts:

1) Shocked that people are asking for due diligence for $1000, but it kind of makes sense because one of the benefits of AngelList is that they get more new angels to participate and I think a lot of new angels are using this for their education. Might be good to make suggestions via post to backers on how those new angels can educate themselves in other ways than asking the entrepreneur questions. As one resource, I’ve been tracking the deal terms of each deal to watch for trends, etc. I’d be happy to share with any backers interested in seeing it along the way.

2) This “shadow backer” thing is annoying and I suspected this would be the case. It would be great if AL would stop sending out those public updates to announce which syndicates are investing in what or at least hold off for a few days until we have a better idea of how much will close.

3) The not knowing how much is going to close issue is definitely a problem. Talked to other entrepreneurs with a similar experience who had to turn down outside investment and then go back and ask for it again. I think AL should shorten the time frame for which backers can actually make their investment. It’s such an easy process that 3 days should suffice. I think this will both mitigate the due diligence seekers and shadow backers, and also address the “not knowing” process. At first, I felt a sense of urgency and felt like I had to do it within 24 hours, so I made that happen. Then I heard from two entrepreneurs that I was the only person to come in within 24 for one and one of two in 48 for another. Started slacking a bit after that. Not good.

4) Lastly, when we first signed on to this, I felt like I was going to be publicly flogged by AngelList if I didn’t back everything the syndicate invested in. If my memory serves me, they had language stating that there was a strong expectation that investors would back every syndicate investment unless they had a conflict of interest. If they didn’t, AngelList reserved the right to block that investor from investing in other syndicates. As a result, I did not take the decision lightly, but I was 100% committed once I decided to do it. They have since backed off on their language about this. Not sure it is a good thing and I am thinking this is why we are seeing the low close rate:

New language from AL: “Backers agree to invest in their lead’s syndicated deals, on the same terms as the lead. They also pay the lead a carry.

Backers can stop backing a syndicate at any time—of course, all of the backer’s existing investments in the lead’s deals remain intact when they stop backing.

Backers can also opt out of specific deals. Backers that consistently opt out of a syndicate’s deals may be removed by the lead.”

This improvements would be great, but all in all, I’m really happy I did it. Great learning experience and so great to see all of these companies raise funding more easily. Thanks for doing this.

http://www.feld.com bfeld

1. Yeah – see my comment above – I think investors are getting comfortable with being small angels even when they have direct interaction with the companies. It’ll need to play out over time as old angels (used to doing $25k – $100k / deal) get comfortable with the Syndicate decision and new investors learn how to be angel investors.

2. Yeah – we need to figure this out. Goal – get more money for the company, but not via an end around through the shadow backer dynamic as it undermines the whole process.

3. We just cut out a step (as I hope you saw) and are now going straight to closing after we launch. Tell me if that’s not obvious.

4. Yup. The 99 investor rule blew this up, as did the overall syndicate tempo. We are now doing more “pre-commits” like the FG Angels Backers Fund we did for $1,000 / deal commitments. We are starting to play around more with this.

http://about.me/frank_miller Frank W. Miller

Shadow backers are a market force on the carry.

Elizabeth Kraus

#3: Wasn’t immediately obvious that the process changed, but clear now. Much better than getting the reservation email and fewer emails are always a plus. Nice change.
#4: Makes sense that this is the cause. Thanks for the explanation.

kevrmoore

Thanks for sharing, Brad and Steve. That’s great stuff. AL syndicates are in their infancy, but I have some concerns. 1) If an investor only has $1k to invest, or even less than $10k, then a highly illiquid, risky startup investment may not be the optimal allocation of their investment capital. 2) If a small investor needs substantially more diligence to assess and understand the investment beyond what the Syndicate Lead provides, then they probably shouldn’t be investing in the syndicate at all. 3) The excess capital pouring into syndicates could lead to abuse by syndicate leaders who use this “free money” to invest in higher risk, more experimental opportunities with other peoples’ money (possibly for advisory shares or side deals with the company), wait to see what breaks out, then deploy fund capital in significantly derisked opportunities. I am NOT suggesting that FG does this, but the potential is there, as I am not sure that the accountability and disclosure mechanisms are in place and incentives properly aligned for AL syndicates.

I think the crowfunding equity model will evolve quite a bit over time, but in my humble opinion, I do see a whole lot of inexperienced, albeit purportedly accredited, main street “angels” pouring money into syndicates who likely do not adequately understand the highly illiquid, risky nature of these investments or the necessity for a broad, diverse portfolio to improve the likelihood of success. I fear possible press and regulatory blowback down the road when most of these new main street angels lose their money. It will be fascinating to see how this all plays out. Either way, fascinating change in the landscape and great discussion topic!